(Reuters) – The Ugandan shilling firmed on Tuesday on the back of lower local currency liquidity in the money markets and slow dollar demand by importers, breaking a five-day losing streak.
At 0907 GMT, commercial banks quoted the shilling at 2,910/2,920 per greenback, slightly up from Monday’s close of 2,930/2,940.
The central bank sold an unspecified amount of dollars for the tenth time this year on Monday as it sought to stabilise the shilling. The shilling is down nearly 5 percent this year.
“The market is very low on shillings and the squeeze is pushing the unit up,” said Ali Abbas, trader at Crane Bank, referring to the shilling.
“(Dollar) demand has also slowed down… the central bank’s interventions have cut appetite for speculative positions.”
Traders said the liquidity squeeze had pushed overnight lending rates to 25-30 percent compared with levels of below 10 percent when liquidity is sufficient.
Much of the shilling’s recent depreciation has been fuelled by a combination of strong corporate dollar demand, the global strength of the dollar and worries that government spending plans ahead of elections next year could fan inflation.
The central bank has sought to reassure investors by saying it would be vigilant against inflation.
Isaac Iga, chief dealer at Orient Bank, said players who had built large dollar positions in recent days were now paring those positions, offering support to the local currency.
“The mid-month tax payments have also taken out a great deal of shilling liquidity and worsened the squeeze,” Iga said, referring to companies meeting their local tax obligations.